Question

The Diversified Portfolio Corporation provides investment advice to customers. A condensed income statement for the year ended December 31, 2018, appears below: Service revenue $ 1,100,000 Operating expenses 800,000 Income before income taxes 300,000 Income tax expense 60,000 Net income $ 240,000 The following balance sheet information also is available: 12/31/18 12/31/17 Cash $ 425,000 $ 80,000 Accounts receivable 140,000 110,000 Accounts payable (operating expenses) 90,000 70,000 Income taxes payable 20,000 35,000 In addition, the following transactions took place during the year: Common stock was issued for $120,000 in cash. Long-term investments were sold for $60,000 in cash. The original cost of the investments also was $60,000. $90,000 in cash dividends was paid to shareholders. The company has no outstanding debt, other than those payables listed above. Operating expenses include $40,000 in depreciation expense. Required: 1. Prepare a statement of cash flows for 2018 for the Diversified Portfolio Corporation. Use the direct method for reporting operating activities. 2. Prepare the cash flows from operating activities section of Diversified’s 2018 statement of cash flows using the indirect method.

Answer 1

1.

Presenting the cash flow statement by direct method:

2. Presenting the cash flow statement under indirect method: